1 November 2000 GST/HST Interpretation 32074 - Sale of Land and Section 193 Input Tax Credit

XXXXX:

Thank you for your facsimile letter of March 14, 2000 to the Income Tax Rulings Directorate which has forwarded the letter to our office for reply concerning your eligibility for a rebate of the Goods and Services Tax (GST). The Income Tax Rulings Directorate has answered your other questions concerning the income tax treatment of your transactions in its letter of July 18, 2000.

Statement of Facts

Your representation of the facts is as follows:

1. On XXXXX, you and your husband purchased 120 acres of land (the "property") in the XXXXX. The title to the property was put in your husband's name, but the funds for the purchase came from both you and your husband. Your husband, who was a GST registrant at the time XXXXX declared tax payable on a form GST-60 and claimed full input tax credits (ITCs) with respect to this tax payable (please refer to Fact #10).

2. Starting in April 1993, the property was developed by installing a driveway, a well, a septic system, hydro, and telephone service.

3. In June 1993, you and your husband acquired a mobile home for $ XXXXX and moved it onto the property. Shortly thereafter, you both moved into the mobile home and it became your principal and sole residence. Your husband self-assessed under section 191 of the Excise Tax Act ( ETA ) and remitted GST on 20 acres of land.

4. On XXXXX your husband made an application to subdivide the property into three 40-acre parcels.

5. On XXXXX, you bought your husband's interest in the property. You obtained a GST registration number under your name XXXXX). During a telephone conversation of XXXXX with the undersigned, your husband, who is also your accountant, stated that the 20-acre portion on which your husband had self-assessed was sold exempt of GST ^[vii]1, and the remainder of the parcel (100 acres) was sold to you for $ XXXXX plus GST of XXXXX. As a registrant, you declared this latter amount payable on a GST-60 form and claimed a full ITC on your return.

6. By a subdivision registered on XXXXX, your property was subdivided into a 40-acre parcel and a 80-acre parcel.

7. On XXXXX, you moved off of your property and, in November 1996, sold the mobile home for $ XXXXX.

8. In early 1997, you sold the 80-acre parcel of land for $ XXXXX.

9. In October 1999, you sold the remaining 40 acres for $ XXXXX, and collected and remitted tax of $ XXXXX on the sale.

10. Since 1992, you (or your husband) have rented out the cultivated land (approximately 105 acres) for purposes of keeping the weeds under control and the land worked. This generated revenues of $ XXXXX per year in the years 1997 and 1998 and $ XXXXX per year in the period from 1994 to 1996.

11. Your husband has claimed business losses during the years 1992 and 1993 and you have claimed business profits on this 120-acre property.

Interpretation Requested

As a result of your taxable sale of the 40-acre land parcel in 1999, are there any provisions in the Excise Tax Act which allow you or your husband to receive a refund of the GST paid by your husband in 1993 on the 20-acre portion of the land as a result of the self-supply under section 191 of the ETA?

Interpretation Given

In order to answer your question, we have to examine the application of the GST to earlier transactions which have a bearing on your sale of the 40-acre parcel in 1999. The actual application of GST to these transactions may not have been correct in some cases.

1. (a) We wish to point out that in 1992 your husband may have claimed full ITCs incorrectly because he was entitled to ITCs only to the extent of his use of the land in commercial activities under subsection 169(1) of the ETA. Consequently, he would not have been entitled to claim the part of the ITCs in respect of the portion of the property that was for his personal use and enjoyment.

Under section 298 of the ETA, a tax assessment will generally not be made more than four years after the time the tax was payable.

(b) In 1993, your husband was not considered to be a builder under paragraph (a) of the definition of "builder" in subsection 123(1) of the ETA as he is excluded by paragraph (f) of the same definition by the fact that he did not acquire the home in the course of a business or an adventure in the nature of trade. He was also not considered to be a builder under paragraph (c) of the same definition of "builder" as he acquired the mobile home for use as his residence and not to make a supply of the mobile home ^[viii]2. Moreover, he was not deemed to be engaged in the construction of a mobile home under subsection 190.1(1) of the ETA because he did not make a supply of the home before it has been used or occupied by any individual as a place of residence. Finally, he is not considered to be a builder under subsection 190(1) of the ETA, as he is excluded under paragraph (f) of that subsection for acquiring the home to use as his place of residence. Consequently, since your husband was neither considered to be a builder nor a person engaged in the construction of a residential complex in 1993 when he installed the mobile home on his parcel of land for use as his place of residence, he was not subject to self-supply under section 191 of the ETA.

Your husband may have been entitled to a New Housing Rebate (NHR) with respect to any tax paid on his acquisition of the mobile home, if he applied within the two-year statutory time limit from the day of transfer of possession of the home. A refund of tax paid in error may also be available under section 261 of the ETA if an application is filed within four years after the day the tax was paid.

In short, your husband should not have self-assessed in 1993, and, as indicated in section 1(a) above, he should have taken partial and not full ITCs in 1992.

2. We also wish to point out that, for GST purposes, the land included in a "residential complex" cannot generally exceed a half-hectare. As indicated in the attached CCRA Policy Number P-069 "Land Allowance for Residential Complexes", land in excess of a half-hectare is administratively considered to be not reasonably necessary for the use and enjoyment of the place of residence unless it can be shown that it is. This would have affected not only the 1993 partial repayment of ITCs but also the 1994 transfer of title to the land from your husband to yourself. The ITC repayment would have been applicable on only one half-hectare of land and not 20 acres. Moreover, GST may have been applicable on all but one half-hectare of land ( not 20 acres) when the land was transferred to you in 1994.

3. Your sale of the 80-acre parcel in 1997 may be subject to GST, as it may be excluded from exemption by paragraph 9(2)(a) of Part I of Schedule V of the ETA as land previously used as capital property in a business with a reasonable expectation of profit.

For a determination of the GST status of the sale of your 80-acre and 40-acre parcels of land in 1997 and 1999, you may wish to contact our XXXXX.

4. Section 193 of the Act allows a registrant who makes a taxable supply by way of sale of real property to claim an input tax credit for previously non-recoverable tax paid by the registrant in respect of the property, except under certain circumstances. In the case at hand, you have claimed the full amount of the tax paid by you upon purchase of the 120-acre property, which means that there was no non-recoverable tax paid at the time of the sale of the 40-acre parcel in 1999. Please note that this tax paid means tax paid by you, and not by another person. Consequently, for purposes of section 193 of the Act, the ITC eligible when you sold the 40-acre parcel is nil.

Concerning the GST paid by your husband in 1993, there are no provisions in the Act which allow a refund to you of tax paid by another person.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact our XXXXX office at the above address and telephone number.

Yours truly,

Bao Tran
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate